(8.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans that were approved by the Company's shareholders and are administered by the Company's Board of Directors, or the Management Development and Compensation Committee of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the success and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company's success.

The Company awarded grants of 22,642 shares of restricted common stock to certain members of management during the three months ended March 31, 2014. Fifty percent of the shares subject to each grant will be earned based upon achievement of an EPS performance requirement for the Company's fiscal year ended December 31, 2014. The remaining fifty percent of the shares will be earned based on the Company's achievement of a relative total shareholder return ("TSR") performance requirement, on a percentile basis, compared to a defined group of peer companies over a three-year performance period ended December 31, 2016. The shares earned based on the achievement of the EPS and TSR performance requirements, if any, will vest based on the recipient's continuous service to the Company on December 31, 2016.

The grant-date fair value of the TSR portion of the award granted during the three month period ended March 31, 2014 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.87 years, (ii) risk free interest rate of 0.62%, (iii) expected dividend yield of 3.59% and (iv) expected stock price volatility over the expected term of the TSR award of 39.4%. The grant-date fair value of all other restricted stock awards is equal to the closing market price of our common stock on the date of grant.

In addition, the Company granted 11,200 shares of restricted common stock to management during the three months ended March 31, 2014. The shares will vest after completion of a three-year service requirement. The market price of the restricted stock awards on the date of grant was $21.19.

The restricted stock awards granted to management in 2014 do not have rights to dividends or dividend equivalents.

The following is a summary of restricted stock award activity for the three month period ended March 31, 2014:


	Weighted Average		Market
	Number of		Price at
	Shares	Grant Date
Outstanding at beginning of year	65,040	$	16.92
Granted	33,842		17.63
Vested	(24,728)		17.02
Forfeited	(7,037)		20.07
Outstanding at end of period	67,117	$	16.91

As of March 31, 2014, there was $737 thousand of unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 2.4 years.

The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were no stock options awarded during 2014 or 2013. The following is a summary of stock option activity for the three months ended March 31, 2014 (dollars in thousands, except per share amounts):


					Weighted
				Weighted	Average
				Average	Remaining		Aggregate
	Number of			Exercise	Contractual		Intrinsic
	Options			Price	Term		Value
Outstanding at beginning of year	192,934		$	19.83
Exercised	(5,925	)		18.62
Expired	(15,623	)		23.78
Outstanding and exercisable at end of period	171,386		$	19.52	2.5	$	602

The aggregate intrinsic value (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) of option exercises for the three months ended March 31, 2014 and 2013 was $25 thousand and $3 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the three months ended March 31, 2014 and 2013 was $110 thousand and $13 thousand, respectively.

The Company amortizes the expense related to restricted stock awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income is as follows (in thousands):


	Three months ended
		March 31,
		2014		2013
Salaries and employee benefits	$	81	$	85
Other noninterest expense		22		17
Total share-based compensation expense	$	103	$	102